The Asymmetric Pass-Through Effects of Interest Rate and Interest Rate Liberalisation in Nigeria

Abstract

This study investigates the symmetric and asymmetric effects of interest rate to lending rate in Nigeria prior to and after interest rate liberalisation of 1986 using annual data from 1970 to 2024. By employing a linear ARDL, the study indicates a long-term association and an inadequate pass-through in both the short-term and long-term in Nigeria. The interaction variable between interest policy rate and its liberalisation dummy indicates a receptiveness of lending rate to fluctuations in interest rate. However, the nonlinear ARDL (NARDL) indicate that lending rate reacts more vigorously and quickly to positive interest rate (tightening) than to a negative interest rate (easing), suggesting downward rigidity in lending rate movements. Whilst the amount of the effect increases in the post liberalisation, this asymmetry remains apparent in both pre and post liberalisation periods.